Hershey: We're a knowledge company, not candy firm

ADVANCE FOR WEEKEND EDITIONS SEPT. 29-30 - FILE - In this Feb. 12, 2010 file photo, Hershey's Senior Vice President, J.P. Bilbrey, President Hershey North America, gets read ring The Opening Bell at the New York Stock Exchange in New York.. J.P. Bilbrey, CEO of The Hershey Co., works under daily pressure to sell more products outside the United States. Derry Twp.-based Hershey is the number one candy company in North America. But investors demand growth, and growth in foreign markets _ where Hershey isnít number one _ is viewed as the difference between a company whose revenues and stock price continue to rise or an also-ran. (AP Photo/Craig Ruttle)

HERSHEY — J.P. Bilbrey, CEO of The Hershey Co., works under daily pressure to sell more products outside the United States.

Derry Township-based Hershey is the number one candy company in North America. But investors demand growth, and growth in foreign markets — where Hershey isn’t number one — is viewed as the difference between a company whose revenues and stock price continue to rise or an also-ran.

So it might come as a surprise to hear Bilbrey explain that Hershey is no longer a candy company. It’s a “knowledge” company that makes candy.

That self-view is a key part of Hershey’s strategy for growth, both in and outside North America.

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It has allowed Hershey to form tight relationships with major retailers and participate in discussions involving much more than Hershey’s Kisses and Trick-or-Treat.

“This has enabled the Hershey Co., which was a confectionery company before, to manage the entire front end of Wal-Mart,” Bilbrey said. “We manage Wal-Mart on the front end for Coca-Cola, Pepsi, for Duracell, for ourselves, for all our competitors.

“So when they talk about how do we set up the front end of the store, how do we want people to approach the lanes, what products should we have there, we are the ones they turn to consult with,” he said.

Hershey also works with major retailers — such as CVS and Target — to plot how they will help each other grow.

“It means we’re sitting down with the leaders of these companies and not talking about what they’re going to buy in July, we’re talking about what they want to do over the coming five years,” Bilbrey, 56, said during a recent interview.

The evolution was quickened by Hershey’s failed attempt to buy European chocolate maker Cadbury a few years ago.

The pursuit of Cadbury sprang from Hershey’s desire to get bigger in order to better compete in markets outside North America.

That route was cut off when Kraft stepped in and bought Cadbury. Hershey was left to figure out not only how it would compete against Kraft-Cadbury, but also against vast food and candy maker Nestle, and Mars-Wrigley, which had recently joined forces.

“I said we are going to be smarter than anybody. That’s our scale advantage,” Bilbrey said.

This evolution to a company that views information and consumer insights as its most valuable commodity also reflected Hershey’s realization, around 2008, that its strategies for growing its brands and sales were no longer adequate.

Sales had always been good, and the company was lauded for its well-tuned distribution system. Most importantly, Hershey’s roster of products included an assortment of household names.

Yet there were concerns about the company strategy at the time of adding new flavors and varieties and a multitude of pack types. There were signs that approach would no longer work. Retailers, for one thing, sought simplicity and lack of clutter on their shelves.

Hershey further concluded it wasn’t maximizing market penetration and potential sales. So it shifted the focus to attaining a better understanding of customers, and of what makes them buy.

Hershey now has offices in Bentonville, Ark., home of Wal-Mart, where Hershey managers participate in strategic discussions with managers of the world’s largest retailer. It requires confidentiality agreements and walls of separation between Hershey employees, including some who become privy to information about Wal-Mart they can’t share even with Bilbrey.

“We’ve become much more thought leaders in the industry, versus just experts within our category, and that has been a huge change for us. It takes us to a new level of discussion we haven’t been in before,” he said.

Now, one his top challenges as CEO, he said, is to “ensure we continue to improve as individuals, attract the talent, and bring the knowledge solutions that the future will require.”

It doesn’t mean Bilbrey isn’t thinking about foreign markets.

The failed attempt to buy Cadbury was a low point for Hershey. It focused attention on the fact that Hershey derives only 15 percent of its revenues from markets outside North America.

Some analysts concluded that, given the size of Hershey’s competitors and their head start in emerging markets, Hershey’s prospects for global growth were dim.

But three years later, when looking at Hershey’s revenues and stock price, that’s no longer the case.

Its stock price is trading upwards of $70, more than twice what it traded for during the first half of 2009.

He pointed out that in markets such as Europe, where competitors are well-entrenched, gaining market share requires heavy advertising and isn’t highly-profitable.

The best opportunities, he said, exist in markets including China, Brazil, Mexico and India, where gross domestic product is growing at an annual rate of five percent or better.

“There is a direct correlation and a parallel line between GDP growth and consumption of our category,” he said. “As people’s lives improve, they enter the category.

He can point to numbers to make the case Hershey is on the right path.

Hershey, with annual revenues of $6.5 billion, is in the midst of a five-year plan to attain $10 billion in annual revenues. The plan calls for international growth of about 15 percent per year, leading to $1 billion in international sales in 2015. However, international sales have been growing 20-25 percent annually, putting Hershey a year ahead of it goal, he said.

As have many iconic American manufacturers, The Hershey Co. has evolved considerably over the years, shifting production outside the U.S.

A global restructuring carried out a few years ago closed seven North American plants, including one in Reading, eliminated 1,500 U.S. jobs, and added a factory in Mexico.

Yet the company managed to sustain a substantial presence in its central Pennsylvania birthplace. The company has closed its century-old factory in Hershey and replaced it with the newly-expanded West Hershey chocolate factory. West Hershey is the company’s largest and most technologically-advanced facility, churning out products including 70 million Hershey’s Kisses per day.

The $300 million expanded facility has a core workforce of about 1,000, plus 100 temporary employees who work as needed. But the expanded plant, being more efficient, requires fewer workers and the local workforce shrunk by about 500.

The workers, who are unionized, also made wage concessions that mostly affect new hires, in order to prevent Hershey from sending production elsewhere.

A current sore spot for workers is that, as the plant works out bugs and deals with production delays, many workers are enduring excessive overtime, said Dennis Bomberger, the business manager of the Chocolate Workers Local 464.

“The issue here is we’re saying we can’t get any time off because we have to work all the time, sometimes seven days a week, for more than eight hours,” he said. “They are grateful they have a job, but eventually it gets old working all that overtime.”

Some veteran workers are convinced the company is using overtime to drive them out so they can be replaced with new hires at lower wages.

For his part, Bilbrey has been publicly praising the workforce, saying they have a higher “sense of purpose,” for reasons including the fact that generations of them have worked for Hershey, and their love of founder Milton Hershey and his devotion to community and humanitarian causes including the Milton Hershey School for disadvantaged children.

The company plans to house about 1,000 administrative employees in part of the century-old factory on East Chocolate Avenue, which was sold for $50 million to a Delaware-based trust.

Hershey has signed a long-term lease. Other parts of the historic factory will be renovated to house possible uses such as offices, a hotel and loft space.

Two miles away, the West Hershey plant can accommodate further expansion, including production of new products. Asked about the possibility of local expansion, and more jobs, Bilbrey said it’s impossible to predict what might occur.

“I’m optimistic about our company’s health. I’m optimistic about our company’s future,” he said. “Hopefully, that means more investment, and more people, in all of our communities.”